WTO against domestic economy

The government is in the process of making a National Procurement Policy. Preference will be given to domestic suppliers in purchases made by the government. Let us assume the government needs to buy file covers for keeping the records. Foreign suppliers are willing to provide these at, say, Rs 8 per piece while domestic suppliers want Rs 10 per piece.

It is proposed that the government will nevertheless buy from domestic suppliers so that production takes place, jobs are created and taxes are paid in the country in the manufacture of the file covers. The government will lose money in the purchase. However, it will gain from the generation of jobs and from the “multiplier” effect of domestic purchases.

Purchase of file covers from a foreign supplier will lead to increased production, technological innovation and entrepreneurship in the foreign country. These benefits will accrue in India if the government purchases the file covers from domestic suppliers. The above policy is an admission that free trade does not deliver. There was no reason to make such a policy if free trade was the successful path to economic growth.

In that case, Indian manufacturers would supply goods to the governments of foreign countries while foreign manufacturers would supply goods to the government of India. Governments of all the countries would benefit from the availability of cheap goods from across the world. The fact that the government procurement from domestic producers will be beneficial for the country also means that purchase of goods produced by domestic producers by consumers too will be good for the country.

This policy would run against the rules of the WTO, however. We got a taste of this in the ruling made by the appellate authority of the WTO in the solar panels case. The Government of India had launched the Jawaharlal Nehru National Solar Mission. We do not have large reserves of coal or deposits of uranium. On the other hand, our needs for energy are increasing rapidly. Thus, the government wanted to push solar power.

Plan was that the government would buy solar power from domestic producers under long-term contracts and sell it to the distribution companies. In this way, the government would protect the domestic producers from the vagaries of the market. The Mission required the producers to use solar panels Made in India, known as Domestic Content Requirement.

Idea was that the solar panel industry would create jobs in the country. The cost of solar panels produced in India is about 10 percent higher than imported panels. The government decided to pay this higher cost for the development of the industry and the creation of jobs. The United States, however, objected to this provision saying that it violated the rules of the World Trade Organisation which required member countries not to discriminate between domestic and foreign suppliers.

The Appellate Authority of the WTO ruled last year that the Domestic Content Requirement imposed by India was indeed violation of the WTO Treaty. The WTO had given a similar ruling two years ago against State of Ontario of Canada. The Government of India has subsequently filed a case against certain State Governments in the United States that require such Domestic Content Requirements.

The State of Minnesota provides rebates to install solar panels made within the State. Massachusetts provides rebates for solar panels manufactured in the state. Nearly one-half of the U S states have similar programs that promote renewable energy along with promoting domestic industries. I think the Government of India has a good case against these subsidies and I congratulate the government for raising this issue.

This is a slap on the face of the United States. However, it does not solve the problem of our solar panel industry. The beneficiary of elimination of subsidies by the US States will be China, which is the major exporter of solar panels to the US. At root of the dispute is the high cost of solar panels in India. The cost of panels produced in China is less because of various subsidies given to the manufacturers.

A report tells of a company named LDK Solar. The local government gave a welcome cash grant of $ 29 Million, or about Rs 19 crore. Local banks gave easy loans to the company. The National Government gave tax exemptions.

The Chinese government also looked the other way on the environmental destruction perpetrated by such manufacturers. A study undertaken by consulting firm Good Company found that carbon emitted during the manufacture of solar panels in the State of Oregon in the U S were 23 per cent less than in China. The low price of Chinese solar panels is due to these reasons.

In this backdrop, we need to face the problem of free trade directly. Fact is that free trade involves a race to the bottom. Indian solar panel industry cannot compete with the Chinese if the latter are provided cash subsidies and allowed to pollute the environment. We need to provide protection to our solar panel industry by imposing import taxes on imports from China.

This problem is common to imports of most items like milk powder, electrical equipment, etc. The development of domestic industry requires protection from foreign suppliers. Thus there is a direct conflict between our domestic industry and the WTO. Indeed, it can be argued that Indian industries have gained by increasing exports that have been facilitated by the WTO.

But our successes are few because our industries are not given cash subsidies and not allowed to pollute the environment as the Chinese industries. Development of our industries without subsidies and pollution can only take place if we provide protection from imports.

Growth of Indian economy requires that the government provides protection to the weaker members until they develop the capacity to compete globally. Economists call such protection as given to “infant industry.” We must provide protection to nascent industries just as we provide protection to an infant until he grows up. We cannot expect startups to compete will well established global players from day one.

The government must seek amendment in the rules of the WTO to legitimise such protection given to the infant industries across the sectors. The way forward is to seek amendment of the WTO Treaty. We must demand the right to provide protection to domestic industries in order to create jobs in the country. Author was formerly Professor of Economics at IIM Bengaluru

By Dr Bharat Jhunjhunwala